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Short Sellers Take Aim at Cheetah Mobile’s 117% Advance

The higherCheetah Mobile Inc. (CMCM)climbs, the more bears become convinced that the Chinese security-software developerwill plunge.

As the stock has more than doubled in price since its May trading debut, shares being shorted by investors to profit from a drop have surged to 33 percent of the listed American depositary receipts, according to data compiled by Markit. That’s the highest percentageamongthe 79 companies on the Bloomberg index of the most-actively traded Chinese equities in the U.S.

While bullish investors are bidding up the stock price on speculation that the Beijing-based company canboostad revenue from smartphone security applications and reduce reliance on desktop computer users, short sellers are betting that management will struggle to implement the change, making the shares overvalued.

“I just don’t see Cheetah Mobile as a good investment,” Dan David, who is the co-founder of Skippack, Pennsylvania-based Geoinvesting LLC and has a short position in the stock, said in a Sept. 3 phone interview. “They are going to see some serious headwinds in the future” because their main mobile apps are not needed for the new generation of smartphones which will do automatic cleaning, he said.

The fair value of Cheetah Mobile would push it below its initial public offering price of $14, said David, who is holding his bearish wager through a personal account. A 117 percent price surge in the shares in four months has pushed their valuation to 50 times estimated earnings, compared with a multiple of 19 for companies on the Bloomberg China-US Equity Index, according to data compiled by Bloomberg.

‘Limited Experience’

Cheetah Mobile soared 13 percent to $30.34 yesterday, the biggest gain on the China-U.S. gauge, which slipped 0.3 percent. The Shanghai Composite index was little changed at 10:15 a.m. today, while the telecom sub-index in the CSI 300 index retreated 0.5 percent.

Andy Yeung, Cheetah Mobile’s chief financial officer, said via phone on Sept. 2 that the company is focused on its operational performance and pays limited attention to the bearish trading.

“Although our mobile applications have proven to be highly popular, we have a short operating history and limited experience in the mobile Internet industry,” the company wrote in a regulatory filing from April. “Even if we succeed in continuing to attract a growing user base for our mobile applications, we may not be able to monetize our mobile operations successfully.”

Monthly active users of Cheetah Mobile products such as the Clean Master app more than doubled to 284.3 million as of June from a year earlier, according to a statement last month. Online ads accounted for 75 percent of its total revenue last quarter.

Qihoo Shorts

Qihoo 360 Technology Co., which is also focused on offering web security software in the local market, said Aug. 24 smartphone users of its main apps reached a record 641 million in June, almost doubling from a year earlier. The Beijing-based company trades at a price-to-earnings ratio of 25 and has short interest of 3.3 percent on its stock, data compiled by Bloomberg and Markit, a London-based provider of financial information, show. Average short sales on the Bloomberg China gauge are about 5 percent.

Cheetah Mobile’s third-quarter revenue will be between $69.3 million and $70.9 million, the company said Aug. 19. The better-than-estimated forecast followed sales in the three months through June of $61.3 million that were 10 percent higher than the average analyst projection, data compiled by Bloomberg show.

The current share price is reasonable given Cheetah Mobile’s latest financial results, which showed initial success in getting income from its mobile user base, according to Ian Bezek, a co-founder of White Diamond Research in New York.

‘Significantly Undervalued’

The company’s revenue will increase by an average of about 88 percent annually in the next two years, based on fiveanalysts’projections compiled by Bloomberg.

“If these estimates play out, Cheetah Mobile shares are significantly undervalued as compared with other Chinese Internet and security firms,” Bezek said via e-mail on Sept. 4.

The Clean Master product is the No.1 mobile app in the Google Play tools category worldwide by monthly downloads, according to its Aug. 21 statement, citing App Annie Ltd., an analytics and marketing service.

While the second-quarter results were “solid” and mobile traffic and revenue growth was decent, the stock is expensive and its sales come primarily from the domestic market where it is not the leading provider, 86Research Ltd. wrote in a note Aug. 20, recommending that investors avoid the stock.

“We remain cautious on Cheetah Mobile due to their small share in the domestic browser market, low visibility on overseas monetization, and rich valuation,” Shanghai-based analysts including Antony Tong at 86Research said.